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Warner Exec Brings New Tech Ideas to the Home Entertainment Table

10 Mar, 2006 By: Erik Gruenwedel

When Warner Bros. revamped its home entertainment group to encompass home video, online, wireless, games, anti-piracy and emerging technologies, it upped former EVP of new media Kevin Tsujihara to run the show.

The evolving digital playground is upending the status quo, and not just theatrical distribution, and the new Warner Bros. Home Entertainment Group president has been at the forefront of this change.

Tsujihara once commandeered Entertaindom.com, Warner's ambitious Internet portal that that all but promised to do away with the studio system, make media instant, interactive and personal. Now, his goals might not be so lofty, but the stakes are just as high.

HMR: With your promotion, Warner appears to be aggressively pursuing digital distribution of content. What effect does this have on the future of packaged media? Is the studio's focus changing?

Tsujihara: There is definitely a transition taking place as we look at packaged media today. The transition is occurring primarily in two areas. One is the transition from standard definition to high definition with packaged media. The other is digital distribution.

HMR: Do you believe digital downloads will circumvent the need for high definition packaged media?

Tsujihara: I think they are different products. I think it will impact it. And one of my responsibilities is to balance each one so 1 + 1 doesn't equal 1 1/2.

From our perspective, we believe packaged media is still going to be a very, very significant revenue generator in the near term. And we look primarily from the perspective of the music industry. I can't think of an industry other than news on the Internet that has been impacted more by digital distribution than music. And in music you still have 80% to 90% of the revenue coming from packaged media, i.e. CDs. Obviously, iTunes has had a huge impact on the music industry but there is still a significant amount of revenue being generated by packaged media.

There will still be a meaningful business as it relates to next-generation media vs. current-generation packaged media as long as the products are differentiated. There will probably be differentiated product offerings in hi-def because of the sheer bandwidth required for a high-definition movie.

We have to manage that reorganization, which is one of the reasons why we reorganized Warner Bros. and creating the home entertainment group that we did.

HMR: Will evolution of digital distribution re-jigger the distribution food chain?

Tsujihara: I think it is a real reality. The windows as we know them today — theatrical, home video, pay-per-view, pay television, network television — are definitely experiencing some shifting. And it is primarily occurring between pay-per-view, VOD and home video. As you look at the rental transaction and go into a Blockbuster, Movie Gallery or rent it from Netflix you see pay-per-view/VOD is essentially the same utility for the consumer: They are borrowing it for 24 to 48 hours and can watch it as many times as they want in that time period.

In one case they have to return it to a store or mail it back to Netflix. On the other, it either sits on their hard drive, or Time Warner Cable or Comcast is delivering it to them.

It is the same utility, but we have a 30-day or 45-day lag between when they can go get it at Blockbuster vs. when they can get it from their cable company or satellite operator. It's the same transaction. So working from the consumer's perspective, I'm not sure why that makes sense. If it doesn't make sense for the consumer then the VOD business on a-la-carte basis is being somewhat handicapped from being able to compete against physical alternatives.

I believe a VOD or rental transaction is different than a sellthrough transaction.

HMR: But sellthrough is still the most lucrative to the studios and will always supersede rental or VOD, pay-per-view, etc.

Tsujihara: Absolutely. Sellthrough has the highest margins on an individual transaction basis. The challenge is, we don't have the ability to make the product available to a given consumer at a given time. I can't go out to Blockbuster and sell them product and tell them they can't rent it until 30 days after I released it theatrically. If I sell it to them I have to let them do whatever they want with that product, which is rental.

But I'm not giving the same product availability to Time Warner Cable or Comcast or somebody else.

HMR: Wouldn't you create greater margins distributing product via Time Warner Cable prior to rental? You could keep more of the pie.

Tsujihara: Yeah, I've been thinking about that. But the ecosystem is pretty big here. So you make one change and it affects multiple others as well. I was showing one piece of the puzzle. We, like everyone else, are trying to figure out what is the right window for pay-per-view in regards to the distribution food chain to maximize your profits.

From my perspective you have to work backwards from the consumer. What makes sense to the consumer and what offerings are you going to make to the consumer and when.

When Fox talks about creating an earlier window before DVD at a higher price point for high definition product, obviously the number of potential impacts is there.

If you could do it in a way that is secure…obviously we have concerns about the analog hole and the ability to make perfect copies. But avoiding the piracy issue for a moment, you have the potential impact on theater operators. Currently you have a three-to four-month theatrical window for DVD that we want to cut in half.

I'm sure theater operators would be a little concerned on some of the product going out that early and the impact on revenue. That's one part of the ecosystem. Then I would assume the Wal-Marts of the world might be concerned about what it would do to home video sales.

If this does become a reality, the most secure and best distributor becomes the cable operators.

The iPod is creating a whole new window for television product the day after it is released. I can't sell a physical product for months after its release on television. That's a whole new window that was created overnight.

HMR: How important is the video iPod market considering the screen size, capacity and battery life?

Tsujihara: For episodic TV product, given its 21-minute size and the fact portability for TV product is a neat feature, I think it is a real distribution model for television product. And that's not to say the screen size of the iPod is going to remain stagnant.

I think the movement of the iPod to the living room with enhanced speakers was an interesting announcement given that iPod has always stayed away from speakers. I think the evolution into the living room through the speakers and then the TV set is important.

HMR: Should Apple get all the credit for the new TV download phenomenon?

Tsujihara: I've been crediting Steve Jobs for a while. Creating a consumer experience and brand is incredible not once but twice. The core technology what they are doing is not rocket science. It has been around for a while. Two CES shows before the iPod we were talking about iRiver, RIo and other Microsoft-enabled devices. That's why I'm not afraid of new players like iPod and Google. But nobody until Apple created a brand and demand for these devices.

HMR: Does Warner's former online entertainment portal Entertaindom.com now seem more reasonable?

Tsujihara: You mean still give me nightmares? (laughs) I do believe a lot of what started on the Internet has come full circle. Some of the companies, like Yahoo, that were able to withstand the bubble bursting are now back. Our industry is at a crossroads. While packaged media is still going to be a meaningful revenue generator, we have to look for new ways to grow.

Look at the music business. They have not been able to grow their business. And that's what we need to do: constantly re-invent ourselves. We always worry about impacts on the ecosystem we have to figure out a way to grow the pie.

Another distribution channel we haven't discussed is the kiosk. That's a form of digital distribution that keeps the retailer in the game and maximizes their foot traffic. It is an interesting way to get the full features of a DVD that would be more difficult to distribute through DSL or cable modem.

We are working on a number of solutions. We think it is a huge opportunity. And being holder of arguably the largest content library in town, I have a vested interest in finding new ways to sell it.

HMR: Will there be Warner-branded kiosks?

Tsujihara: I don't know if they will be Warner-branded or white-labeled kiosks for Japan or Europe. Especially where retail space is at a premium if you could have 3,000 titles available it really does create a number of new opportunities for us.

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